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Sponsored Video: Is There a Gray Area for Insider Trading?

by ETF Base on June 17, 2013

This post is sponsored by PA Consulting:

We hear the phrase insider trading all the time – because it’s rampant. That’s “market efficiency” for ya, huh? Well, it’s not always so black and white. I was just thinking about an example within my firm where something that used to be allowed (or wasn’t disallowed really) is no longer allowed. That begs the question as to whether that used to be insider trading or if it’s just a practice that should be avoided.

Is Hedging Your Own Shares Considered Insider Trading?

As a company employee who was being granted stock options each year, it wasn’t at all uncommon for people to sit around the water cooler and lament that fact that each year, we get these options that only expire worthless a few years later because the firm was in a continual state of share price decline. An easy solution to at least capture some benefit (and hedge your company shares – also valuable if investing in company shares within the 401(k) [which I highly discourage]) is to sell call options on shares. So, if you were granted a block of 500 shares which is equivalent to 5 options contracts, what if you sold 5 calls outside the money for a thousand bucks once a year? If your shares finally rebounded and were vested, you could exercise the shares and use those proceeds to close out the options contract. Likewise, if shares sunk, the options would expire worthless in both accounts and the ones you sold on the open market would give you the full premium to keep upon expiry.

Well, my firm recently issued an edict that there should be no trading of options in shares of our own company. While I don’t really care and that’s easy to comply with, I wonder if this would be considered “insider trading” or if it’s more that the company wants to avoid the perception that employees are shorting (really hedging in my opinion, but it depends who’s judging you) their own stock.

This is an example of a gray area to me. Then, there’s black and white. We also had an example of an insider trader years ago. The story was really mind-blowing, but I’m curious if you’ve ever had anyone within your company terminated and/or prosecuted for sharing insider information. It’s completely plausible and may have happened in your firm but they were never caught. For a realistic example, take a look at this video by PA Consulting and let me know if you think this can happen in your office?